Mortgage Lingo for First Time Home Buyers

Posted Sep. 30th 2011 under Mortgages & Loans

Mortgages are broken down into two types based on the amount of the down payment, and the amount of risk the lender is taking by providing you the loan.

Fixed Rate Mortgage
A fixed mortgage has a fixed interest rate for the entire term of the loan. With a fixed-rate mortgage, the thee interest rate over the time period of the mortgage is set at the time the mortgage is originated. The benefit of a fixed-rate mortgage is that the homeowner will not have to contend with varying loan payment amounts that fluctuate with interest rate movements.

High Ratio Mortgage
If the down payment is less than 20% of the purchase price of the home you want to buy, you are also required to be insured by the Canadian Mortgage and Housing Corporation (CMHC) or by one of several other private insurers that operate in Canada. Talk to your mortgage broker, as the premium cost can be quite steep.

Variable Rate Mortgage
A variable rate mortgage is a mortgage that has fixed payments, but the interest rate fluctuates with any changes in interest rates. If interest rates go down, more of the payment goes to principal and if interest rates go up, more of the payment goes towards the interest.

Amortization
Amortization is the repayment of a loan calculated so that the principal will be paid in full through monthly payments of principal and interest for a predetermined period of time. Many home mortgages are fully amortized in 15, 20 or 30 years. This is different from the mortgage "term." For instance, you could have a fixed term mortgage with a five-year term, based on a 30-year amortization.

Open Mortgages

An open mortgage is where you can pay your mortgage off in full or in part at any time without being penalized. By paying down your principal early, you can save a lot of money in interest. This is why the average fixed interest rate for an open mortgage is often 0.4-0.6% higher (or more) than a closed mortgage for the same term.

Closed Mortgages
This is the opposite of an open mortgage. You cannot pay off the mortgage before the maturity date, refinance, or re-negotiate the interest rate or term without being penalized. However, many closed mortgages allow you to double your payments or pay additional lump-sums at varying intervals -- depending on your lender's terms.

The Saugeen Team will assist you in finding a Mortgage Broker in Saugeen Shores